There is enclosed a memorandum of long conversations with Sr. Beltran
over the week-end.2
His program, both with respect to a sound, free economy, based on private
enterprise and stimulation of domestic and foreign investment and to the
urgent need of social progress, is in broad terms substantially
identical with what the Department, other agencies of the U. S.
Government, and this Embassy have long advocated. After three years of
weak and vacillating Peruvian Government we now have one headed by a man
who deeply shares our views as to what is necessary and is determined to
do it. He will work closely with us and seek our advice but he will not
need much of it. What he needs most is our moral and some material
support. I believe the latter will be both relatively small and soundly
based but its psychological effect will be great.
On my return I find more support for him and more optimism that he can
succeed than I expected. Despite the great difficulties he is having, he
has a good fighting chance to succeed. If he fails, as was pointed out
in Mr. Sayre’s Despatch No. 41 of July 22,3 not only will Peru be in a grave situation
economically, politically and socially, but the American philosophy of
free economy and free enterprise will also be gravely discredited in
Peru.
I am doing everything I can morally here by radiating confidence in the
new Government to all and sundry and will be asking concrete assistance
as soon as sound projects are developed. I know the Department will
appreciate the importance of rapid, and wherever possible, favorable
action.
[Enclosure]
Memorandum of Conversation
SUBJECT
PARTICIPANTS
- Sr. Pedro Beltran, Prime Minister and Minister of
Finance
- T. C. Achilles
Over the week-end I was the only guest at Beltran’s hacienda and he
and I spent Saturday afternoon and evening and all day Sunday
discussing what he hoped to achieve, how he hoped to do it, and what
assistance from the U.S. might be practicable. His hopes from us are
much more modest and much sounder than those of his recent
predecessors.
Why He Accepted Office
Having participated in 48 hours of soul searching with him last year
before he turned down the same two positions, I was surprised that
he had accepted them this year. He said that a month ago he had been
convinced that Prado was about to fall, that no successor to the
President or Prime Minister was in sight who could hope to change
the three-year drift into inflation and economic stagnation and the
centuries-old resistance to social progress. He foresaw nothing but
accelerated deterioration, with or without a military government,
and probably an early Communist-fomented social revolution. He
believed that the President would not have turned to him except from
similar acute pessimism. The friends he had consulted had urged him
to accept as a patriotic duty. He had debated waiting until after
“one more government had fouled things up worse” but concluded that
might be too late.
The President had promised him full support. He did not count on this
except insofar and as long as the President considered their
fortunes linked. He had been assured of full support by the military
and believed them. (Top Army and Navy sources have confirmed this to
me.) He had not sought APRA
support but had been assured of it at least on a trial basis.
(Prialé4 has
confirmed this.) He could count on the support of the wealthy class
in their own interest, except for the Miro Quesada group.
(Presumably correct.) In Congress the MDP would have to support him in their own interest.
They with APRA constituted
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a
majority. The Christian Democrats generally shared his views and,
while they had refused to join his government and might vote against
him, probably would not cause him too much trouble. He expected all
out opposition only from the Communists, Acción Popular and the Miro
Quesadas, whose El Comercio5 has been following the Communist line
increasingly strongly. He had accepted and would wage an offensive
rather than defensive fight for his program.
[Facsimile Page 3]
Principles
A sound, free economy was fundamental to everything else. Next to
that, economic and social progress were essential and urgent if a
social revolution were to be avoided.
Financial Program
The first requisites were to stop inflation, restore confidence and
stabilize the currency and prices. He was inheriting a billion-sol
deficit for 1959 and the prospect of a larger one in 1960 unless
drastic measures were taken. He could not perform miracles but he
would do everything humanly possible and as quickly as possible. He
felt that the private sector had been squeezed hard enough and that
the public belt must be tightened.
The first essential step was to stop borrowing from the Central Bank.
He had done so and would not resume. This in itself would do much to
stop inflation and exchange depreciation. He could neither reduce
this year’s budget nor reduce salaries but he would cut expenditures
all he could. He had already found some expendable personnel and
would get rid of them; more could be done through attrition by
non-filling of vacancies as they occurred. Military expenditures,
particularly for new equipment, could and would be cut. The
President and three military Ministers had promised to cooperate on
this. He realized that difficulties would arise when it came to
specific cuts but he was determined to make them and thought he
could count on a reasonable measure of cooperation.
He did not believe further tax increases at this time feasible either
politically or economically. He was trying to speed up tax
collection. (IPC’s new agreement with the Government provides paying
the latter 50 per cent of its net profits. The Company already makes
monthly estimates of its annual income and has agreed to make
monthly anticipatory tax payments on the basis of such estimates.
Beltran hopes to persuade other American and Peruvian companies to
do the same.) He also expects to tighten tax enforcement. He had not
been aware of the
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tax enforcement measures recommended by
Costa6 and approved by
Gallo Porras, many of
which have not yet been given effect, and was delighted to hear
about them.
Ending price controls on meat and raising the controlled price on
bread and rice to a realistic level should ease the deficit by from
100 to 200 million soles.
Nevertheless he believed he would need an additional one billion
soles (roughly $40 million) for operating expenses until next June
30. He was determined not to resort to the Central Bank. IPC had
agreed to lend $20 million for this purpose. He wondered whether IPC
could make it $40 million. I said the Company’s manager7
[Facsimile Page 4]
here
had had difficulty persuading the head office to approve the $20
million and felt that one company alone should not be called on for
the whole amount. He thought small amounts might be raised from
others such as Grace, Cerro de Pasco, Southern Peru Copper, and the
Telephone Company (he volunteered that he hoped for an early
solution of the telephone problem) but probably not much.8 Could the U.S. Government make
a loan for operating expenses? I suggested that we first explore the
possibility of using the existing EX–IM credit for this purpose. He
readily agreed. He would agree to any reasonable conditions attached
to any U. S. loan and could write some himself. He recalled his
article in “Foreign Affairs” in 1956 in which he had written that
the conditions attached to U. S. loans were of more value to the
recipients’ economy than the loam itself.
He realizes that the 1960 budget will be a major problem and battle.
He does not think he can reduce it below this year’s total and
believes that, given this year’s wage increases, it will be a major
victory to hold it to that level. He is counting on increased
business activity, some based on renewed confidence and some
otherwise stimulated, and non-inflationary financing to provide the
revenue. His social program, particularly in housing, should also
stimulate business.
Social Program
Beltran feels strongly that unless the reactionary feudal attitude of
the Government and ruling class is changed quickly, there will be a
social explosion, sparked by the Communists but participated in by
most of the underprivileged 95 per cent of the population. He hopes
to follow the British pattern of “social progress by conservative
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government” and believes that the time is ripe for far-reaching
measures, that enough men in his Cabinet and in the ruling group in
Peru share his view to make them practicable, and that they need not
be of a nature to arouse excessive opposition from the wealthy. (I
hope he is right and believe the outcome of his attempt will have
profound consequences for Peru’s future.)
He believes that the slums of Lima, Arequipa and a few other cities
and the over-populated Cuzco-Puno-Arequipa area in the South are the
danger areas. (So do I.)
As stated in his radio broadcast on assuming office,9 he gives top priority
to housing, roads and land reform.
Housing
He believes that housing has the greatest single appeal for the urban
and many of the rural underprivileged. He opposes
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government financing and construction and is insistent on private
enterprise and private financing through the building and loan
association method. His recently established association in Lima has
reached a capital of 5 million soles. He intends to push wealthy
Peruvians to increase this to 15 million soles very shortly and then
to apply to the DLF for a loan
(amount as yet undetermined although $4 million has been mentioned)
to be invested in the association on a sol for sol basis. He then
plans to establish similar associations in Arequipa, Puno, Cuzco and
other cities. He believes that once these associations begin making
loans, the inflow of savings from small depositors will be enormous.
The building trades should also boom.
Roads and Land Reform
He considers these inter-related in that much of the land to be
provided those seeking it must be in newly developed areas. Road
improvement will also stimulate increased production and better land
utilization. He believes the opening of new lands in the jungle more
economic than further irrigation on the coast.
Assuming that the IBRD and DLF loans for the Aguaytía-Pucallpa
road will shortly be approved, he gives top priority to penetration
roads in the South. I urged that priority be given to the
Bagua-Yurimaguas road in the North on the grounds that it would open
up the best land, that engineering studies for it had been
completed, and that the quality of the land would attract the
Indians even from the far South. He granted the first two and
thought the Yurimaguas area of great importance for the future but
did not believe that the Southern Indians would
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go there or stay if
they did. He stated that most of the Indians who had migrated to the
upper Huallaga (between Tingo María and Tarapoto) had stayed less
than a year. The South was urgent.
He gave first priority to a road from Sandía to the Tambopata. The
Indians were already moving into the Tambopata area in large numbers
even though they had to go and come and carry their produce by
trail. The terrain was difficult but the distance short and the
Indians had proved they wanted to settle there. He would like to see
the road built as a dramatic example of U. S.-Peruvian cooperation,
surveyed by U. S. Army engineers using helicopters, jointly financed
and built by the Peruvian Army with the engineering equipment
already furnished by the U. S.
(Beltran is keenly interested in using the Army, and other services
where practicable, for constructive development of the country and
also in popularizing it, within the Army and without, to bulwark the
country’s future internal order. He also shares our views on the
value of using the conscription period for civic and technical
training.)
[Facsimile Page 6]
I shared his interest in the dramatic but reminded him that no real
engineering studies had been made of a Tambopata road, of the time
it took to get from conception through studies, financing and
construction to completion, and the slow progress being made on the
nearby, similar purpose, Smathers-financed Macusani-San Gabán road.
He agreed to expedite progress on the latter but insisted on the
advantages of a dramatic approach to the Tambopata road and of
constructing it “a la Yanqui” rather than “a la criollo”. I agreed
to look into the possibilities, primarily of ICA financing a study by U. S. and
Peruvian engineers of the practicability of the road.
He is now pushing his Commission on Housing and Land Reform to
complete its study on the latter subject by the end of this year and
hopes to be able to take specific measures next year.
Livestock Development
I told him that former Minister of Agriculture10
had nearly completed studies of a program designed to make Peru
self-sufficient in meat and that I had found Washington favorably
disposed to consider a loan for this purpose, provided the price of
meat was freed from control as had now been done. He had not known
of this and was delighted.
He thought the first step should be studies of pasturage, on the
coast, in the Sierra and in the jungle, and then the importation of
improved breeds. Technical assistance would be needed. I asked about
the financing of the local expenditure. He thought it should be done
by the Banco
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Agropecuario, which in turn should be
financed to an increasing extent by the commercial banks rather than
by the Central Bank. This raised a problem of interest rates but he
believed it could be handled.
Identification of U. S. with Program
He said he knew his financial and social programs could succeed only
with close U. S. cooperation and help and that it would be in the
best interests of both Governments for the U. S. to be closely
identified with progress on all fronts. I entirely agree. He stated
that he wished to formulate the specific aspects of his programs,
and carry them out, in close consultation with us and to give the U.
S. maximum credit in the process. I am sure he will.
